Three-Quarters of Insurers Fear Future with Current Systems

An overwhelming majority of insurers are concerned about their system capabilities in the face of future regulatory pressures.

In the aftermath of the 2008 economic downturn, asset managers throughout the economy are struggling with incoming regulatory and financial challenges. Those in the insurance industry fear their current systems will not be able to handle the pressure.

Northern Trust recently conducted a survey among 250 senior investment managers at global insurance companies in the U.S. and Europe to gauge their concerns about investment operations management. While two-thirds claimed their systems can adequately handle current regulations, over 70% admitted they are concerned – or unsure whether they should be concerned – about the future.

“Globally, there is an increase in regulation in insurance companies, both current and proposed, that is driving complexity in an already complex business,” says David Sullivan, SVP and North American head of insurance at Northern Trust.

The increase in regulation, greater variation in investment classes and styles, and aging systems are all driving uncertainty among insurers, Sullivan explains. Less than 30% are confident that their investment operations infrastructure is sufficient to meet future challenges.

Insurers in the U.S. will face increased complexity from the Dodd-Frank Act while those in Europe comply with the Solvency II directive. Both regulations will heighten insurers’ demands for products that help manage risk, report on investment performance and adhere to compliance requirements. While these mandates are still being understood and rolled out, says Sullivan, they are both extensive regulatory bodies that are poised to significantly impact the industry.

These regulations will test the limits of legacy systems. Although this is not a current problem, insurers’ operations will eventually require new infrastructure to manage and understand investment data. This is likely to strain company resources.

Regulatory challenges aside, insurers’ outdated systems also face the threat of a retiring workforce. Employees who are conversant on those systems have been managing them for a while, Sullivan explains, but fewer will be around in the future.

According to the study, 39% of respondents expect 11% to 25% of their workforce to retire within five years. One-third anticipates 5% to 10% of their staff to retire during the same period.

Survey responses indicate that the number of insurers considering outsourcing operations is expected to decline from 14% to 10% over the next five years. Given the impending regulatory pressures and predicted lack of talent, they should reconsider.

Insurers should evaluate which functions are core to operations and which can be outsourced. In most cases, insurers who think they can face technological challenges on their own should consider working with outside vendors to upgrade their systems and decrease costs. After all, college graduates learning the latest programming systems are unlikely to apply for jobs at companies using outdated software.

Tom Secaur, COO at Citisoft, advises insurers to act soon. While they currently have the luxury to choose whether they prefer internal or external systems, their time is limited. The longer they wait, he states in the report, the fewer options they will have.

Kelly is an associate editor for InformationWeek. She most recently reported on financial tech for Insurance & Technology, before which she was a staff writer for InformationWeek and InformationWeek Education. When she's not catching up on the latest in tech, Kelly enjoys ... View Full Bio

Great points, Kathy, and I agree. If these businesses don't begin to plan some system upgrades before the regulatory pressures sink in - and their workforces start to retire - they're all going to be in hot water.

Umm ... am I the only one who is bothered by these findings? Not that regulation is getting more complex -- that is old news, no one should be surprised by it. What concerns me is that it sounds form these results that people are surprised and unprepared for this. What does it say about our industry if companies are not investing for the future -- in infrastructure and modern systems? As Nate suggests below, it's usually regulatory pressure that drives these investments, but the investments also pay off in terms customer insight, improved processes, better service, etc. It's 5+ years from the financial crisis, and these professionals are just realizing now that uncertainty and change are the new normals? Jeez, I hope these professionals aren't managing MY investments!

Of all the impetuses for core systems modernization, regulatory pressure may be the most boring, but also most imperative. Insurers can't afford to find themselves out of compliance with regulators when they need to get new products to market fast in the digital economy.